Mazda expects many advantages from new Salamanca plant

Mazda Motor Corp.'s new assembly plant in Salamanca, Mexico, which officially opens on Thursday, Feb. 27, gives the company a low-cost production base; an export platform for shipping cars to the United States, Europe and Latin America; and a natural hedge against swings in the yen's exchange rate.

Mazda Motor Corp.'s new assembly plant in Salamanca, Mexico, which officially opens on Thursday, Feb. 27, gives the company a low-cost production base; an export platform for shipping cars to the United States, Europe and Latin America; and a natural hedge against swings in the yen's exchange rate.

It thus brings the small automaker closer to more stable growth and a balanced international footprint and, perhaps, ties to industry giant Toyota Motor Corp. But it also carries the risk of overextension at a time when U.S. light-vehicle sales growth seems poised to plateau and emerging markets are slowing.

For years, Mazda's profits were hammered by a strong yen because of the carmaker's reliance on exports from Japan.

In 2012, facing a fourth straight year of red ink, Takashi Yamanouchi, Mazda's then-CEO and current chairman, rolled out his structural reform plan to stop the bleeding and give the company, with global sales of just 1.2 million units, a shot at survival in an industry in which scale is king. The main elements of that plan: boost overseas production to shield the company from currency fluctuations, cut costs, increase sales and recruit other automakers for product alliances.

Those elements come together in Mexico. The new factory will give Mazda a major yen-hedging production presence in North America. The vehicles built there, which use Mazda's Skyactiv technologies, are cheaper to produce and more profitable to sell. And the plant will be home to a product-sharing deal with Toyota that provides a hedge against a downturn in demand.

The yen's recent weakening has turned what was a major liability into a windfall. In the nine months that ended Dec. 31, Mazda booked a ¥97 billion ($921.9 million) foreign-exchange gain, leading net profit to triple to $735.8 million.

But Mazda can't count on the yen always being in its favor, says Koji Endo, an auto analyst at Advanced Research Japan in Tokyo.

"You might say the yen is weak, so why not keep exporting from Japan? But you can't rely on that foreign exchange rate to keep exporting," Endo says. "It makes sense to minimize the risk and minimize the cost by going to Mexico. It's a very strategic plant."

The Mexico plant is the carmaker's only North American assembly site. Mazda ceased production in 2012 in Flat Rock, Mich. Salamanca builds the redesigned Mazda3 compact car for the United States, Canada and Mexico as well as markets in Central America, South America and Europe.

Output, which began in January, will ramp up to a pace of 140,000 units a year by April and expand to 230,000 next year once the redesigned Mazda2 and the next-generation Toyota Yaris are added to its lines. The extra output, plus production from China, Russia and Thailand, will put Mazda close to its goal of building half of its vehicles outside Japan by March 2016, up from 30 percent two years ago.

"This will be purely incremental overseas volume. So as a result, the overseas production ratio will increase accordingly," says Mazda CEO Masamichi Kogai.

Mazda expects to build more than 900,000 vehicles in Japan in the current fiscal year, which ends March 31.

Mazda's arrangement with Toyota also checks another box of Mazda's turnaround plan: alliances. Mazda agreed in November 2012 to build 50,000 units of a Toyota-branded car based on the Mazda2 at the Mexico plant. Mazda could learn from the arrangement about Toyota's manufacturing expectations and quality tolerances. For Toyota, it could be a test of Mazda as a future capital tie-up partner.

The plant will also be flexible. Jim O'Sullivan, CEO of Mazda North American Operations, says the plant will be able to adjust its mix of Mazda2 and Mazda3 production to match global demand for those products. The flexibility mirrors that of Mazda's assembly plant in Hofu, Japan, which builds the CX-5 compact crossover, Mazda3 and Mazda6 mid-sized sedan.

That flexibility is enabled in part by Mazda's Skyactiv portfolio of vehicle frame, chassis and powertrain technologies. Where Mazda once used different platform architectures for its Mazda3, Mazda6 and other vehicles, the same basic Skyactiv platform designs can be scaled up or down to underpin anything from a subcompact car to a mid-sized crossover, Mazda engineers say.

The Mazda3, Mazda6 and CX-5 crossover now all use the full Skyactiv suite of technologies, making it easier to build them side by side on the same line to match demand.

That cuts manufacturing costs, yielding larger profits than from Mazda's non-Skyactiv lineup. The Mazda CX-5 and Mazda6 were engineered to be profitable even at unfavorable exchange rates of around ¥80 to the dollar. With the dollar now trading around ¥100, the result is far fatter profits, especially since Mazda is able to command higher prices for vehicles with fuel-efficient Skyactiv technologies.

"They are improving margin quite a bit," Endo says. "That's partly because of the weak yen but partly because the market is willing to pay a premium for their cars because of Skyactiv."